Production, Exports, And Factors Employed In Bangladesh

The Analysis of Production in Bangladesh

Bangladesh is a small sized economy of 147,000 sq. kilometers but a home to 160 million people. In terms of popularity of the world economies, it is ranked eighth. In the past decade, this economy has been noted to have maintained a robust growth on the economy. This has led to an optimistic projection of its GDP growth in some years to come to be approximately 7.2% (Ahamed, 2016). It’s per capital income is about US$ 1300 which has enabled it to offer highly competitive wages. This economy’s performance has been very poor until the 1990s when much improvement took place. This paper shall cover the various developments and changes that has contributed to the increased growth of this economy.

Bangladesh economy is a great producer of rice since it is the dominant food crop. 75% of agricultural land in Bangladesh is used for rice production. Since the 1980s, the production of rice has been rising year after year considering the fact that there is a population growth every year. In the 1980s, Bangladesh was ranked number four in terms of rice production; however, it has been overtaken by Indonesia and Malaysia over time which has resulted in it rank to fall back to sixth. Rich cultivators have benefited from improved yield which has resulted from the use of more advanced inputs though at an increased cost; such inputs include; seed variety of high yield, fertilizers and irrigation. Other than rice production, the farmers also produce jutes; the current development of irrigation is also contributing to an increase in wheat and maize production in this economy. There are also other production activities that are important to this economy. Production of ready garment is an important economic activity in this economy and is playing an important contribution in the international market. Self-sufficient industries have been developed in steel, pharmaceuticals and food processing. This economy’s reserves of natural gas are substantial and thus ranked 7^th in production of natural gas in Asia. The economy’s deposits of limestone are also large.

When Bangladesh was founded in 1971, Jute and tea were the major sectors of exports. The manufacturing of garments was lower during this era. However, the government identified the potential of growth in the textile manufacturing industries and promoted the producers through policy easing; this led to the high development in this industry up to date. This economy is a major clothing exporter and is ranked 2^nd after China; it accounts for 6% of the total world’s clothing (Economists-pick-research.hktdc.com, 2016). 80% of Bangladesh export earning comes from ready garments.

Major Export Timeline in Bangladesh

In the 1980s and 90s, this sector was less developed. Much of the development has occurred in the 2000 century. The number of factories have increased to more than 4000; this is a very big development.

The leather industry is also an important part of Bangladesh exports as the revenue raised annually is roughly US$ 1 billion. Other than textile and leather, the other sectors that for the basis of this economy’s export are; Jute, shipbuilding, fish and seafood.

This economy is more labor intensive and is more interested in human capital development. The economy chief source of growth comes from international trade. Thus, their main investment lies on the development of its international trade. The development of international trade in the 1990s saw a huge growth of this economy. The free trade agreement further made in 2000s boosted the international trade with other economies. However, this economy has been operating for many years at an international trade deficit. Despite the growth of its export level, this economy’s importation level has grown rapidly and has exceeded the exportation level; it is importing more than its exportation. The manufacturing sector is the primary sector for its exportation.

The production of goods like tea has gone up over the years although the level of exportation for this product has fallen over the years. Between 1985 and 1990, this economy used to export nearly 90% of its produced tea. However, there has been an increased demand for domestic consumption of tea which has led to a massive drop in the amount of tea exported from this economy. Chittagong (2009) noted that as at 2009, this economy’s domestic demand was approximately 90% which left only 10% for exportation. This was also a projection that in some years to come that this economy will turn from a tea exporter to tea importer given the domestic demand growth. This also explains why currently Bangladesh is not a tea exporting economy; the previous importers have already lost interest in its tea and looked for a market elsewhere.

The major commodities imported by the Bangladesh economy include; Machinery and equipment including computers: US$8.4 billion, Iron and steel: $2 billion, Chemicals, Foodstuffs, Petroleum products and Textiles (Foot, 2010). In additional to these imports, Workman (2017) noted the following commodities; Cotton: $4.6 billion, Mineral fuels including oil: $2 billion, Vehicles: $1.7 billion, Plastics, plastic articles: $1.8 billion, Animal/vegetable fats, and oils, waxes: $1.5 billion, Manmade staple fibers: $1.5 billion, Knit or crochet fabric: $987.4 million. He also noted that the value of imports in Bangladesh is over US$ 40 billion. The major import destinations are China, India, Singapore, Hong Kong and Japan (Simoes, 2017)

Primary Factors Employed in Bangladesh

According to Heracles (2016), a country is considered to have a comparative advantage in the production of a particular good if the opportunity cost involved is lower than for another country.  Bangladesh’s labor costs are too low compared to other producing economies such as China and Indonesia. This has created a very favorable environment for the manufacturing industry. This has led to the conclusion that Bangladesh has a strong comparative advantage in this manufacturing sector. Many Pearl River Delta region manufacturers in China are exploring the possibilities of relocating their industries to Bangladesh, or rather to diversify in this region so as to avoid the high wage costs in China. There are over 80 million labor suppliers in Bangladesh.

The free trade policies introduction in the year 2000s resulted in an increased expansion in the textile industry and currently accounting for 80% of Bangladesh’s exports. Heracles (2016) noted that this is a form of specialization in this industry and thus the economy has a comparative advantage on textile production. Bangladesh also have a comparative advantage in wages; its wage rate is too low compared to that of India, China and Indonesia (Hussain, 2013). If a country can produce more goods with the same resources as another country, it is said to have an absolute advantage (Chamlagai, 2013). For instance, Bangladesh was an absolute advantage in textile production while French has one in wine production because its soil is favorable.

It is a primary responsibility of the government to ensure that there is a stable economic growth by implementing various actions. The government thus has a sole responsibility of ensuring that there is an improvement in the standard of living for its citizens. There are many provisions the government advance to its citizens. Some of the provisions include; free and compulsory education, the provision of medical cover, provision of food assistance especially in time of severe drought, provision of equal fundamental rights irrespective of sex, religion, race or even the place of birth. The government is also responsible for providing efficient infrastructure to enable movement from one place to another. The government has also provided electrification in the rural areas as an initiative to promote development and the competitiveness of these areas. The Bangladesh constitution provides for equal opportunity in public employment. The government is the sole provider of defense for the citizens; this is also accompanied by maintaining peace and justice which promotes the fair economic operations.

The Distribution of Produced Goods (for Domestic Use and Exportation)

There are several barriers facing the Bangladesh entrepreneurs especially the women who are joining the market at a small scale and contributing to increased economic growth of this economy. One of the problem according to Abdin (2010) and Chowdhury (2017) is the scarcity of funds; some entrepreneurs have no sound securities to offer in order to receive capital from financial institutions. Hughes & Jennings (2012) pointed out that women entrepreneurs in the SMEs have difficulties accessing finances from banks. Another challenge is the lack of sufficient knowledge; most of these entrepreneurs do not have adequate information on the markets and of doing business. Another challenge posted by Kashfia (2013) is that of increased barriers to entrepreneurship. Some of the noted barriers include; power and gas shortage, political instability and heavy traffic.

There are two policy actions mostly in use by many governments including Bangladesh; one is influencing the spending by the governments. This is the spending on investment areas that are meant to expand the economy’s income which is aimed at stimulating the aggregate demand and subsequently the economy’s production level. When the economy is performing poorly, the government need to stimulate the economic growth; it does this by increasing its spending. An example of fiscal policy action is during the global financial crisis where governments raised their spending to stimulate growth. On the other hand, when economy is performing well, the government may decide to lower its spending so as to cover for its deficits; this is especially when the economy’s debt level is very high. The Bangladesh government has spent more on infrastructure development and poverty alleviation (En.banglapedia.org, 2017).

The other fiscal policy action involves the influence on the economy’s tax rate; this is where the government takes discretionary policy of cutting or raising taxes depending on the economic state. During a state of low performance, e.g. during a recession like the global recession, the government cuts it tax so as to ensure households has additional disposable income to stimulate demand. On the other hand, the government raise its tax when the economy is performing well; for instance, during a period of high inflation rate, the government raise taxes to dampen the augmented demand.

Monetary policy actions are supplementary to the fiscal policies. There two monetary policies of the government. One is that of influencing the interest rate. This is where the central bank of the government raise or lower its interest rate so as get the economy at control. During a period of low economic growth, the interest rate is lowered so as to lower the borrowing costs for capital. More borrowing takes place as a result and there is an expansion of investments. On the other side, the government may raise the interest rate so as to control the inflation rate. This is because higher interest rate causes the demand for loans to fall and thus the economy’s demand falls since the reduction in investment contracts the economy’s income.

The Primary Imports of Bangladesh

The other monetary policy involves the direct manipulation of the money supply. This is where the government raise or lower the money supply depending on the economic state. The government does this through various processes such as buying or selling of government securities through open market operations, influencing the reserve requirement for banks, and influence on the short term interest rate (Tarver, 2015). During a period of depressed economic growth, the government may raise the money supply to initiate a stimulus. It can do this by the central bank lowering the reserve requirement so as to raise money available for the other banks to lend, lowering the short term interest rate to enable the other banks to lend at a lower rate, or buying of securities from the public; the payment the central bank makes to the security sellers raises the money supply. On the other hand, the central bank may lower the money supply by raising the reserve requirement to reduce money available for lending, increasing the short term interest rate so that loans are advanced at a higher interest rate so as to discourage borrowing, and finally a sell of securities (Gallant, 2017). When the government sell securities, people pay the government and money is withdrawn from the economy.

The government budget balance is given by the difference between its revenues and spending. When the government spends more than the revenue raised from taxes, it operates at a budget balance deficit. The Bangladesh government is relying on borrowing to facilitate its spending. This means that this economy is raising less revenue but is spending more. The economy thus operates at a budget balance deficit.

Since the 1990s, the Bangladesh government has operated at a budget balance deficit. In the 1990s the deficit was lower but it has increased since the 2000s. Currently the deficit level is very high and is projected to increase further in the coming years. Kallol (2017) noted that the government has proposed a higher budget in the coming year and this is the reason for the increment in the deficit. This deficit will be covered by borrowing from its banking sector and from foreign sources.

The representation of the Bangladesh GDP history in the graph above shows that this economy was performing poorly at a GDP of close to zero from 1960s to 1990s. However, as from the year 2000s, this economy has experienced a fast GDP expansion which has been attributed by the free trade agreement. The current GDP level for Bangladesh is well above 200 USD Billion.

Comparative and Absolute Advantage for Bangladesh

The growth of this GDP in the fiscal year 2015-16 hit a higher level of 7.11% and for 2016-17, a further increment to 7.2% (Dhakatribune.com, 2017)

The economy is fighting to expand its production level by creating good international relationships with other economies. There is much development in infrastructure taking place for example the highway being constructed from Dhaka to Chittagong as part of the China’s belt and road initiative (Economists-pick-research.hktdc.com, 2017). This economy has also maintained a huge supply of labor at a lower cost which is attracting many foreign investors and is also making the domestic firms more competitive in the international market. There is an increased investment in human capital which has seen a rise in the Bangladesh stock of human capital. Inclusivity of the poor in economic development is rising by the introduction of equal opportunity.

The comparison between Bangladesh, Australia and Indonesia real GDP growth rate as presented in the graph above shows that Bangladesh has the highest real GDP growth rate, followed by Indonesia with Australia experiencing the lowest growth rate. In the year 2007, the three economies were having a high performance but fell in 2008-09. After the recovery in 2010, Bangladesh has exhibited a positive real GDP growth rate trend whereas for the others the growth rate has been poor.

The graph above represents the impacts of elections on the Bangladesh economy. Hussain (2012) noted that before an election, the political leaders tend to manipulate the fiscal and monetary policy tools to impress the people with a hope of being reelected. The use of expansionary monetary and fiscal policy has palatable political consequences in the short run. This does not limit the consequences to the short run as excess use of the expansionary policy also has long term consequences of increasing the inflation rate, a reduction in savings and poor trade balance. For the past 5 elections, Bangladesh has experienced a reduction in its GDP (Mukti, 2017). Immediately after elections, the leaders tend to stimulate the economy by raising taxes, reducing the government spending, raising interest rate and slowing money supply growth. Booms and bursts are experienced as a result of regular holding of elections.

The Bangladesh currency is the Bangladesh Taka. This currency was created in 1972 to replace the Pakistan rupees that were initially used as the major currency. At its introduction, it was set at the same value as the Indian rupee. Tk 18.9677 to the sterling and Tk 7.2797 to the USD. The value of the currency has been changed many times and has resulted in a fall in the exchange rate.

Bangladesh Self and Social Interest

Source: Numbeo.com (2017)

The table above shows that the cost of living in Bangladesh is lower than that of Canada; the Canadian price for common goods is very high.

The information derived from trading economics is represented in the above graph indicating the improvement in Bangladesh’s inflation rate. The past inflation levels for Bangladesh has been very high and detrimental to the economy. However, there has been a falling trend for this inflation rate. The current level is lower.

The graph shows that exchange rate in Bangladesh has risen within the past decade. Initially Bangladesh exchange rate was lower at an average of 69 between 2006 and 2010. However, from 2011 to 2017, the average exchange rate is 78.

Conclusion

This economy’s performance was very poor in the past but the current economic growth is very high. The development has been as a result of various policies employed by the policy makers. Bangladesh’s entrepreneurs are faced with many challenges that need to be resolved. A deficit in government budget balance is not an indicator that an economy is not performing well. Many government even those that are performing well have budget balance deficit. As long as the government is efficient in managing its deficit, it is not a problem. Mismanagement results in a risk of loss of an economies credit worthiness for the countries like Bangladesh who are reliant on borrowing to supplement the deficit.

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